Wealth-Transfer Taxes Can Take a Toll on Small Businesses


Most business owners become wealthy the “old-fashioned” way—they work hard. But, suppose a business owner and his or her spouse were to die unexpectedly. Undoubtedly, they would hope their children or other family members involved in the business would reap the benefits of all their hard work.

Unfortunately for surviving family members who depend on the business for their livelihoods, their troubles may have just begun. Although estate planning concerns may arise for business owners from time to time, they are often relegated to the “back burner” due to the more pressing day-to-day demands of the business.

However, without prior planning, there may be no provisions in place to help pay estate taxes, which can be significant—as high as 40% for amounts over the applicable exclusion amount of $12.06 million in 2022. Without any plans in place, selling or liquidating the business may be required to raise the cash to help pay these taxes.

Potential Safeguards

Under the current estate tax laws, there are several steps a business owner can take to help prevent his or her business from being liquidated to raise cash to help pay estate taxes.

One option is to transfer business ownership to family members using certain gifting or sales techniques. Your tax professional can provide guidance regarding your gift tax liabilities. Although relinquishing some control and becoming a minor stockholder is not easy, it can help reduce a business owner’s assets and thus, possibly, minimize the tax bite. In addition, a business owner could establish a trust to help ensure the estate is passed on to his or her heirs, avoiding probate.

Another option is to defer estate taxes. Estate taxes are due within nine months. However, the Internal Revenue Service (IRS) allows qualifying closely held businesses to defer taxes and then pay in installments (with interest) over a period as long as 10 years. In this case, the estate must remain open until all estate taxes have been paid. Therefore, according to IRS records, very few businesses choose this option. Still, family-held businesses may wish to consider taking this step as a way to help avoid a likely drain on valuable assets and the possibility of a closely held ownership coming to an abrupt end.

Benefits of Planning

One effective tool that estate planners often use to help fund estate taxes is life insurance. The business owner can establish an irrevocable life insurance trust (ILIT), which purchases a life insurance policy on his or her life. The policy premiums can be funded by annual gifts made to the ILIT by the business owner, who can use his or her annual gift tax exclusion ($16,000 to each recipient for 2022) in accordance with rules pertaining to Crummey withdrawal powers (Crummey v. Comm, 397 F.2d 82 (9th Cir. 1968)).

Most business owners work long and hard to build their business and want to do all they can to help their heirs avoid a heavy estate tax burden, particularly if the company’s continued operations may be in jeopardy. Therefore, it is important to develop a plan before the need arises.

Keep informed about any changes in estate tax laws and maintain a strategy that works for your business and your family. Consider seeking guidance from a team of estate professionals, including your legal, tax, and financial professionals. While there are obvious up-front costs involved in establishing an estate plan, in the long run, business owners generally find that it is money well spent.

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Important Disclosures:

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual or business owner.

This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.

LPL Financial Representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial.

This article was prepared by Liberty Publishing, Inc.

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